Cash Basis Accounting: Understanding the Default Method for Self Assessment

Cash basis accounting is the default method of preparing Self Assessment tax returns for most sole traders and partnerships from April 2024. Rather than recording income and expenses when invoices are issued or received, this method records transactions when money is actually paid or received. For many small businesses, Accounting on cash basis simplifies bookkeeping, improves cash flow visibility and reduces administrative work.

This guide explains how cash basis accounting UK rules work, the changes introduced from April 2024, whether the cash basis accounting threshold still applies, and when businesses may prefer to opt for traditional accruals accounting instead. For a broader understanding of how accounting methods fit into the UK personal tax system as a whole, our ultimate guide to personal tax in the UK covers income tax, reliefs and reporting obligations in more depth.

What Is Cash Basis Accounting?

Cash basis accounting allows eligible businesses to recognise income when payments are received and record expenses when they are actually paid. Unlike accruals accounting, it does not require income or costs to be recognised when invoices are issued or received.

This simpler approach is intended to make tax reporting easier for sole traders and partnerships by reflecting the actual movement of cash rather than outstanding invoices. Whichever method you use, keeping accurate business records throughout the year remains essential, since HMRC can request evidence to support the figures reported on your return.

Cash Basis Accounting Becomes the Default Method

From April 2024, cash basis accounting UK rules changed so that the cash basis became the default method for most sole traders and ordinary partnerships completing their Self Assessment tax returns.

Businesses that wish to continue using traditional accruals accounting must actively opt out of the cash basis when submitting their Self Assessment return.

Key Changes Introduced from April 2024

Several important changes were introduced alongside the new default rules for cash basis accounting.

• Removal of the cash basis accounting threshold – Businesses are no longer restricted by turnover limits when choosing to use the cash basis.
• Loss relief rules aligned with accruals accounting – Previous restrictions on claiming relief for losses under the cash basis have been removed.
• Interest deduction rules simplified – The previous interest restrictions no longer apply, bringing the treatment of interest in line with accruals accounting.
• Separate accounting methods for different businesses – Individuals operating more than one business can now choose different accounting methods for each business instead of applying one method across all activities.

Does the Cash Basis Accounting Threshold Still Apply?

Before April 2024, businesses had to meet specific turnover limits to qualify for the cash basis. However, the cash basis accounting threshold has now been removed.

This means eligible sole traders and partnerships can generally choose the cash basis regardless of their annual turnover, provided they are not excluded under the relevant tax rules.

Who Can Use Accounting on Cash Basis?

Accounting on cash basis is generally available to:

• Sole traders.
• Ordinary business partnerships.
• Businesses preparing Self Assessment tax returns that meet the eligibility requirements.

Many smaller businesses choose this method because it is easier to maintain and reflects actual cash flow throughout the year. This includes many landlords completing a Self Assessment tax return, who may also be eligible to use the cash basis for their property income depending on their circumstances.

Who Cannot Use Cash Basis Accounting?

Although the rules have become more flexible, cash basis accounting is not available to every type of business.

It cannot generally be used by:

• Limited companies.
• Limited Liability Partnerships (LLPs).
• Businesses that are specifically excluded under HMRC rules.

These organisations must continue preparing accounts using the appropriate accounting framework and tax rules.

Should You Choose Cash Basis or Accruals Accounting?

Although the cash basis is now the default method, it may not always be the most suitable option.

Some businesses may prefer accruals accounting because it:

• Provides a clearer picture of business performance.
• Matches income with related expenses.
• May better support business lending or investment applications.
• Is often preferred where stock, complex transactions or larger business operations are involved. Whichever method you choose, the figures reported will ultimately form the basis of your SA302 tax calculation, which many self-employed individuals need when applying for a mortgage or other finance.

Choosing the most appropriate accounting method depends on your business structure, financial reporting needs and long-term objectives.

Cash Basis Accounting Case Study

David, a sole trader, visited our Wimbledon office after hearing that cash basis accounting had become the default method for Self Assessment. He had always kept simple records but wasn’t sure whether he needed to change the way he prepared his accounts or if he could continue using traditional accruals accounting.

After reviewing his business, we explained that from April 2024, most sole traders automatically use cash basis accounting unless they choose to opt out. Because David was paid shortly after completing most jobs and had relatively straightforward business expenses, the cash basis reflected his cash flow accurately and simplified his bookkeeping.

David also asked whether changing accounting methods meant he had to change the software he was using. We explained that many modern accounting packages support both cash basis and accruals accounting, allowing businesses to choose the method that best suits their circumstances. Once submitted, David could also review his reported figures at any time through his personal tax account, regardless of which accounting method he used to prepare them. Selecting software that can adapt as a business grows can also make future tax reporting and digital record keeping much easier.

By the end of the meeting, David understood that although cash basis accounting UK rules now make it the default method, it is not automatically the best choice for every business. Understanding both accounting methods would help him make informed decisions as his business expanded and his reporting requirements evolved.

Simplify Cash Basis Accounting With Expert Support From Cigma Accounting in London

Understanding cash basis accounting can help eligible businesses simplify their bookkeeping by recording income and expenses when money is actually received or paid. Cigma Accounting supports clients across the Fulham Broadway, including businesses in Eel Brook Common and Fulham Road, helping sole traders and small businesses choose the most suitable accounting method while remaining compliant with HMRC requirements.

Whether you are considering cash basis accounting UK rules or checking the current cash basis accounting threshold, it is important to understand how accounting on cash basis affects taxable profits, allowable expenses, and financial reporting. Choosing the right accounting method can make managing your business finances simpler and support more accurate tax reporting.

Final Thoughts on Cash Basis Accounting

The April 2024 reforms have made cash basis accounting simpler and more widely available by removing previous turnover restrictions and making it the default method for many sole traders and partnerships. Understanding the updated cash basis accounting UK rules will help ensure your Self Assessment return is prepared using the accounting method that best suits your business. With your accounting method settled and records organised, it also becomes much easier to consider filing your Self Assessment tax return early, rather than leaving preparation until the January deadline.